Why Aurora Cannabis Needs to Raise $750 Million

Luke Lango - finance.yahoo.com Posted 5 years ago
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Canadian cannabis giant Aurora Cannabis (NYSE:ACB) stock turned heads in early April when the company announced intentions to raise $750 million through a mixed-shelf offering over the next 25 months.

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Why Aurora Cannabis Needs to Raise $750 Million
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On the surface, it’s a bit of shocker. Aurora is one of the biggest marijuana stocks in the world. It’s growing very rapidly and has healthy margins. Thus, the need to raise cash does raise some eyebrows, and it has created weakness in ACB stock.

The question now is “why.” Why does one of the world’s biggest cannabis companies need to raise $750 million?

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The answer is pretty simple. Aurora only has $110 million in cash on its balance sheet. Its three biggest marijuana stock peers all have much more cash than that, while two peers have billions of dollars in cash sitting on the balance sheet.

The implication? All of Aurora’s peers have more investment firepower than Aurora, and two of them have much more firepower. That’s not good, considering the cannabis industry is in its early stages wherein big investments today will be rewarded with big growth tomorrow.

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Consequently, Aurora needs to raise $750 million, mostly to grow its investment firepower to be more on par with peers. Doing so will enable Aurora to grow more quickly, more adequately defend its early leadership position amongst marijuana stocks, and most importantly, dive into the ultra-valuable U.S. market, where Aurora has zero presence today.

All in all, the shelf offering is actually good news for ACB stock. The one thing holding this stock back has been the company’s lack of resources to compete at scale. That headwind will be remedied by a capital raise, meaning ACB stock should be clear for takeoff.

Aurora Needs Money to Compete

The plain English here is that Aurora needs more money on its balance to compete at scale with its more heavily backed peers. And because no big consumer staples company has come knocking yet with a billion dollar offer, Aurora is finally looking to raise that money on its own.

Broadly speaking, the cannabis industry is in the early stages of a long-term growth trajectory. In early-stage growth markets, investment is critical to long-term success. A company that invests wisely today, will reap the rewards of that investment tomorrow through market share gains in a rapidly growing market. Meanwhile, marijuana stocks that do not invest today, will suffer tomorrow as they lose share to peers who did invest.
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At the moment, Aurora risks falling into the latter category.

Two of Aurora’s peers, Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON), have scored multi-billion dollar investments from global consumer staples giants. Their balance sheets are shored up with billions of dollars for investments, partnerships, and expansion. Canopy has over $3 billion in cash. Cronos is set to have nearly $2 billion.

Aurora, meanwhile, hasn’t scored such a big deal, and cash on the balance sheet measures a meager $110 million. Hypothetically, that means for every investment Aurora makes, Cronos can make 20 of them, and Canopy can make 30 of them. Ultimately, that positions Aurora to lose share in the global cannabis market.

Adding $750 million to the balance sheet changes things. That would put Aurora’s cash firepower at $860 million. That’s much more respectable next to the billion-dollar cash balances at Canopy and Cronos. Thus, with this discrepancy narrowed, Aurora will have the necessary resources to compete at scale with its more heavily backed peers.

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This Money Will Drive U.S. Market Expansion

In the big picture, this $750 million will help Aurora attack the soon-to-be-huge and super important U.S. cannabis market.

The U.S. cannabis market is still in its early stages, but it is rapidly growing and projects to be huge one day. Multiple states have legalized cannabis, hemp is now legal across the country thanks to the passage of the 2018 Farm Bill, and many close observers are optimistic that nationwide marijuana legalization isn’t far away. Consequently, many Canadian cannabis giants, such as Canopy Growth, are positioning themselves to likewise dominate what analysts see as a $100 billion U.S. cannabis market.

One Canadian cannabis company that hasn’t jumped into the U.S. market yet? Aurora. And it’s not because they don’t want to.

Back in January 2019, Aurora chief corporate officer Cam Battley said that the company would be announcing a “hemp-derived CBD strategy to enter the U.S. market over the next few months.” It’s April 2019, and we still haven’t heard much of a concrete plan with respect to that expansion strategy. To be sure, the company has expanded its presence in Europe dramatically during that stretch. But, nothing has been firmly announced on the U.S. expansion side.

Why? Presumably due to a lack of resources. Canopy is making moves in the U.S. market with $3 billion in cash on its balance sheet. Next to that, Aurora can’t do much with $100 million. But, with $860 million, the playing field is much more even. Aurora can finally make some noise.

Overall, then, I see this $750 million raise as being the fuel for Aurora to finally push into the U.S. cannabis market. That’s big news for ACB stock. The one thing holding this stock back has been its inability to expand reach given lack of resources. That will all change if the company uses newly raised growth capital to push into the U.S. market. A move of that magnitude would likely result in a healthy rally for ACB stock.

Bottom Line on ACB Stock

On a pure valuation basis, ACB stock is as cheap as it gets in the cannabis space. This relative undervaluation can be chalked up to a lack of financial resources on the balance sheet. But, this headwind is disappearing, and as it does, the relative undervaluation gap in ACB stock should disappear, too, meaning this marijuana stock could be gearing up for takeoff.

As of this writing, Luke Lango was long CGC and ACB. 

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